Risk profiling is a process for finding the optimal level of investment risk for you, considering the risk required, risk capacity and risk tolerance, where:

  • Risk required is the risk associated with the return required to achieve your goals from the financial resources you have available,
  • Risk capacity is the level of financial risk the client can afford to take, and
  • Risk tolerance is the level of risk the client is comfortable with.

Risk required and risk capacity are financial characteristics calculated using our financial planning models. Risk tolerance is a psychological characteristic which is best determined by way of a psychometric test.

Risk profiling requires each of these characteristics to be separately assessed so that they can be compared to one another. Risk capacity and risk tolerance both act separately as constraints on what you might otherwise do to achieve your goals (risk required). It is unusual for someone to be able to achieve their goals from the resources available within both their risk capacity and risk tolerance.

Getting it right in the end
Where a mismatch between risk required, risk capacity and risk tolerance has been found, our role is to guide you through the trade-off decisions that are required to reach an optimal solution. The final step in the risk profiling process is to ensure that you have realistic risk and return expectations so that we can be given your properly informed consent to implement the investment strategy.

Disclaimer: The information provided is not intended to address the circumstances of any particular individual or entity and should not be considered to be advice in any way. No person should act upon this information without first obtaining professional advice.

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